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Hedge fund redemptions to hit Indian markets

Howard Scott writes (post on Seeking Alpha) that there may be a liquidity situation with hedge fund redemptions that could create a temporary downside:

“If investors want to withdraw money from hedge funds, a 45-day notice period is required, in which the application can be submitted. So for the July quarter, July 1 to August 15 is the application period to withdraw serious money from a hedge fund. Post-August 15 will probably see people queuing up for redemptions in hedge funds. This may lead to a cascading liquidity withdrawal syndrome across emerging markets. This has not happened yet, but if it does, stock prices can be under the selling pressure across markets, where funds have been invested,” said Seshadri Bharathan, director, stock broking, Dawnay Day AV Securities.

What this means is that if US stocks tumble, hedge fund investors will pull out their money. Hedge funds,which invest in multiple countries, may choose to sell out of India – where the markets are doing well – rather than liquidate a down investment in other countries. Which means there will be selling pressure. Dates given are interesting because if investors ask for redemptions by August 15, the fund needs to give them their money in 45 days. So if they ask for money today, the fund has to provide them the money by latest October 1.

While this can sound bearish you should not rush to sell. Why not? Simply because it’s a prediction based on an assumption. That a) investors in hedge funds will withdraw and b) that these hedge funds will sell enough to ruin the market. Let the assumptions pan out. Let markets show a dramatic slowdown. Then we will see.

One indicator seems to be a dip in volume. Today (13th August) saw less than 9000 cr. turnover in stocks and about 30,000 cr. in derivatives (futures/options). These are the lowest figures in the last 45 days. Yet, the market was UP 1%!

If volumes continue to be low and the market stays up, it is an artificial high. Markets are propped up by purchases and transactions – if you have lower volume and high prices it means both supply and demand have dropped. Eventually the equation will go to lower prices where demand increases (the market always moves to where demand will increase).

But volatility is extremely high, as evinced from option prices. So if there is latent demand, it should come in this week. If not, these are signs of a trigger that is due to come. We will find out the reason later.

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